Big financial firms losing power on Capitol Hill

John C. Dugan, the head of the OCC, has defended the value of the current policy for banks and consumers. He noted in a recent speech that without preemption, a bank operating in the Washington area could be required to disclose different information to borrowers in Maryland, Virginia and the District, complicating even the simple task of advertising.

"Consumers benefit from an efficient financial services system where you can operate under uniform rules wherever you go," Dugan said in an interview Friday. "It's important to have strong rules to protect consumers, but what we don't need is 50 different rules."

A divisive issue

But the policy has come under fierce attack from state regulators and consumer advocates. They noted that in many cases, federal regulators failed to impose comparable restrictions on national banks after clearing away the state laws. And they charged that during the financial boom, the OCC and other federal regulators failed to police mortgage lending abuses even when state regulators offered specific warnings.

The question of what should be done about that failure has divided Democrats.

A group of moderates organized as "new Democrats," led by Rep. Melissa Bean (D.-Ill.), argued that the idea of preemption was sound and that the single national standard benefited consumers. Problems had arisen because regulators were too lax, they said, but the appropriate solution was the creation of a strong new federal agency, not a rollback of preemption.

The Obama administration and state regulators, however, argued that the best solution to insufficient regulation is to empower more regulators. The administration proposed that the new agency would set a minimum standard, ensuring that residents of every state enjoyed basic protections, but allowing states the ability to go further.

"Washington doesn't always know what's best," Michael Barr, an assistant secretary in the Treasury Department, said on a conference call Thursday. He said the administration wanted to restore the right of states "to protect their citizens with the rules that they think make sense."

The debate came to a head last week. Bean's group said it would propose an amendment to retain the current law. Liberals warned that if the amendment drew enough Republican support to pass, they would oppose the broader legislation to create the new agency. House leaders and the White House pressured Bean and the moderates to fall in line.

Despite tremendous pressure from the banking industry, Bean ultimately agreed.

In a piece of political theater, Bean now plans to introduce the amendment and then to withdraw it, according to people familiar with the matter. She then plans to engage in a scripted conversation with Frank, in which both are to affirm the importance of further discussions about the issue. Bean can then reintroduce the amendment once the bill comes before the full House, but lobbyists on both sides say they regard the battle as over.